大象传媒

Justice and markets

• Robert Peston
• 3 Sep 07, 10:30 AM

Gordon Brown told us on the Today programme this morning not to worry about the ill-effects of sickness in credit markets because 鈥渢ransparency and regulation鈥� would see us right.

Which might have been an early-morning attempt at wry humour, but I鈥檓 not so sure.

The Prime Minister's transparency and regulation are an aspiration, not a description.

The parts of the financial system which incubated the virus 鈥� the darkling, fetid jungles occupied by hedge funds and structured investment vehicles dealing in collateralised debt obligations and other complex products 鈥� are opaque and largely free from the kind of direct supervisory controls that constrain banks and financial institutions dealing directly with the public.

None of this would matter if the vast majority of us were unaffected by this malaise, if we could be detached bystanders. But the price of trillions of dollars of financial assets is determined in the darkling jungles and those assets are held by the banks on which we rely.

With a collapse in asset prices, there has been a generalised erosion of confidence in credit markets. That in turn has led to a steep rise in short-term interest rates, not the ones set by central banks but the ones that really matter, the that reflect the actual price at which commercial financial institutions are prepared to lend money.

Borrowing costs for businesses and consumers are rising.

Which is why central bankers have been pumping money into the global economy and will continue to do so 鈥� to try to ward off the evil of recession.

Those central bankers are in agonies of confusion, as evinced by the many weird and wonderful things they鈥檝e been saying at their in Jackson Hole, Wyoming. They are torn between their duty to keep the global economy on track and their anathema for bailing out negligent investment bankers and hedgies responsible for this mess.

So quite an important question is whether those who behaved especially irresponsibly are paying a steep penalty. If the culprits are being punished, the global financial system would now self-correct. And there would be no need for Gordon Brown, other government heads, central banks and regulators to steamroller in and impose new restrictions on the free operation of markets.

Have the great investment banks, commercial banks and hedge funds learned their lesson? Can we be confident that they won鈥檛 do it again?

Just asking the question makes me sound silly.

Yes, bonuses won鈥檛 be so bulgy this year and quite a few financial rocket scientists 鈥� especially those specialising in radioactive collateralised debt obligations (CDOs) 鈥� have already been given the boot.

And yes, a couple of state-backed German banks, a few hedge funds, and some structured investment vehicles have suffered serious losses.

Also there are certain markets that have more or less evaporated (for now):

a) it is impossible to raise finance for a leveraged private-equity takeover, that boom has fizzled;

b) more-or-less all CDOs are being treated as toxic by investors, even those that might be palatable;

c) the enormous asset-backed commercial paper market is shrivelling to nothingness before our very eyes.

But let鈥檚 also not forget that the spoils of the boom that preceded this bust were on a mind-boggling scale and were largely pocketed by a few thousand hedge-fund owners and investment bankers. Many of those have cashed in tens of millions dollars each and are barely bruised by the recent turmoil.

For most participants in this market, the moral is pretty clear: they all got rich, and never mind the current mayhem. When a semblance of normal service is resumed, why not do it all over again, but perhaps with even greater gusto?

What鈥檚 more, where there is mayhem, there is opportunity. The smarties at Goldman, Morgan Stanley, Barclays Capital and the others are expected to coin it from clearing up the mess they in part created 鈥� through a business euphemistically called 鈥渞estructuring鈥�.

And they, plus the hedgies, have been raising lots of new capital to buy distressed financial assets, whose distress was caused by鈥� yeah, you guessed it.

• Permalink
• Comments